UK economy should continue to maintain decent growth of just over 2% this year

The UK economy should continue to maintain decent growth of just over 2% this year, down from an estimated 2.2% in 2015 and 2.9% in 2014. Growth in consumer spending is expected to remain supportive, but will likely ease in the second half of the year as real income gains slow on the back of gradually rising inflation. Meanwhile, despite the smoother path of deficit reduction in the Autumn Statement, fiscal tightening will also remain a drag on growth, which will be exacerbated by prospects of higher interest rates and the EU referendum. 

The timing of the first Bank of England (BoE) rate hike has been pushed back persistently in recent years. The proximity of headline inflation to zero has been the biggest obstruction, but so too has the lack of wage inflation. Both should become more favourable over the coming year, helping to pave the way towards the first BoE rate hike and a gradual pace of monetary tightening thereafter. 

"We believe that the first hike will arrive in the second quarter of 2016 - sooner than the markets' current assumption of end-2016/early 2017", notes Scotiabank.

The UK's in-out referendum on its EU membership will likely generate significant uncertainty and weigh on business sentiment and investment in the run-up to the likely summer vote. Prime Minister David Cameron has voiced optimism that a deal could be secured by the end of February, which could lead to a vote as early as June. The main sticking point remains Cameron's determination to prevent citizens of other EU countries from accessing social benefits for four years.